In India’s rate-setting panel, there is a growing chorus for growth

RBI has been fighting a tough battle against high inflation

A cry for economic growth gets louder even as the panel that decides the key rates for the country's monetary policy remains steadfastly focused on its fight to bring down inflation for a long time.

The Monetary Policy Committee (MPC) has largely ignored the growth concerns through this period and reiterated that it would relent until price stability is reached in Asia's third largest economy. The rate-setters kept the key lending rate, repo, at 6.5 percent through the last eight monetary policy reviews, indicating that the last-mile fight on inflation was far from over.

While the MPC stays glued to its duel with inflation, a silent resistance has begun shaping up in its core in favour of a growth stance. The unmistakable call for a reversal from high-rate regime has started firming up. Although it remained a minority voice even at the June policy review, there are clear indications of a stronger demand along the road ahead.

Ashima Goyal and Jayanth Varma, two out of the six-member rate-setting panel, voted in favour of a 25-basis-point (bps) rate cut in the June MPC meet. In the April round of policy review, Goyal had voted for a status-quo in rates, while Varma was the lone dove pitching for lowering the rates to boost growth. Why did Goyal join the call for rate cut? The recently released MPC minutes showed how she argued that keeping the interest rates too high for too long would hit economic growth.

The naysayers, however, overpowered the Varma and Goyal to keep the policy focused on bringing down inflation to the median estimate of 4 percent. But that's not going to happen anytime soon, going by the Reserve Bank of India's own inflation projection. Inflation is expected to remain above 4 percent throughout this fiscal, except for a likely blip of 3.8 percent in the second quarter, showed the RBI’s inflation glide path.

The central bank has retained the FY 25 inflation forecast at 4.5 percent, assuming a normal monsoon. The CPI inflation for the first quarter is projected at 4.9 percent, second at 3.8 percent, third at 4.6 percent and fourth at 4.5 percent.

But, the growth-supportive stance presented by the two mavericks cannot be brushed aside. Their stand points to a clear division in the panel with respect to the course of policy rates and makes a pressing case for a pivot in favour of growth.

Both Varma and Goyal have argued that higher rates for longer duration slows down the growth monentum. In an interview with Moneycontrol on June 24, Varma said high interest rates choke off consumption as high EMIs for home loans and other borrowings eat away a larger share of the income.

Read: As inflation falls, repo should be cut to prevent real rate from rising too high, says Jayanth Varma

Varma also pointed out how high rates discourage private sector capital investment. The point is valid since higher government capital expenditure has offset the impact of poor consumption and capital expenditure.

Goyal went a step further saying higher interest rates for too long do raise the probability of delinquency for sectors with high leverage or rapid growth, such as retail loans, but lending is now risk-based. Also, a rate cut is unlikely to hinder the path to disinflation, Goyal said in another exclusive interview to Moneycontrol.

Read: Keeping interest rates high for too long likely to hit growth, says RBI MPC’s external Member Ashima Goyal

The voices of dissent have begun resonating with the growth lobby looks on course to get stronger, as inflation eases further and, more importantly, fresh risks to inflation glide path, including a likely failure in monsoon and worsening of global factors, do not manifest.